TAX DEDUCTION ( DEDUCTIBLE )

An amount subtracted from an individual's adjusted gross income to reduce the amount of taxable income. The amount you have to pay out-of-pocket for expenses before the insurance company will cover the remaining costs

ACCOUNTING METHODS

There are two main accounting methods used for record-keeping: the cash basis and the accrual basis. Small business owners must decide which method to use depending on the legal form of the business, its sales volume, whether it extends credit to customers, and the tax requirements set forth by the Internal Revenue Service (IRS). The choice of accounting method is an issue in tax planning, as it can affect the amount of taxes owed by a small business in a given year

ACCRUAL BASIS

Accounting system in which revenues and expenses are recognized in the period in which they arise, regardless of when the cash for the revenue or the expenditure actually occurs. Accrual accounting is the only basis of accounting approved under Generally Accepted Accounting Principles and is used by public companies and most privately owned companies. See also Cash Basis

CASH BASIS

Cash basis accounting is simpler and cheaper to perform than accrual accounting, but it can make obtaining financing more difficult due to its inaccuracy.
A major accounting method that recognizes revenues and expenses at the time physical cash is actually received or paid out. This contrasts to the other major accounting method, accrual accounting, which requires income to be recognized in a company's books at the time the revenue is earned (but not necessarily received) and records expenses when liabilities are incurred (but not necessarily paid for)

TAXABLE INCOME

Gross income minus all adjustments, deductions, and exemptions.The amount of net income used in calculating income tax

INVENTORY VALUATION

Determination of the cost assigned to raw materials inventory, work-in-process, finished goods, and any other inventory item. Various methods are allowed in valuing inventory including Last-In, First-Out (LIFO), First-In, First-Out (Fifo) and Weighted Average. Inventory is valued at the lower of cost or market value applied on either an item-by-item basis, a category basis, or a total basis

WEIGHTED AVERAGE

An average in which each quantity to be averaged is assigned a weight. These weightings determine the relative importance of each quantity on the average. Weightings are the equivalent of having that many like items with the same value involved in the average

VALUATION METHOD

Means of determining that a loss has occurred and setting an economic value on it so that a claim can be paid. When an insured suffers a loss, an adjuster must determine that it actually occurred, that it was covered by insurance, and the value of the lost or damaged property. The adjuster, with the help of the insured, determines the cost to repair or replace the covered property. The adjuster computes actual cash value, or replacement cost, minus depreciation. For indirect losses, such as business interruption, the adjuster must make rough estimates, and then must consider Coinsurance and adjust claims payments for it

DEFLATION

A persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money because of a reduction in available currency and credit

FICA

An acronym for Federal Insurance Contributions Act. FICA taxes are deducted from the pay of most American workers to support Social Security programs

UNDERPAYMENT

Invoice payment that is less than the amount billed. The seller may either bill again for the remaining amount, accept the amount received as full payment, or proportionately reduce the service or goods to be delivered. The option chosen depends upon the percentage of difference, the dollar value of the difference, and the seller's objectives

DOUBLE DIVIDEND TAXES

In some cases where the economy is not perfectly competitive, the existence of a tax can increase economic efficiency. If there is a negative externality associated with a good, meaning that it has negative effects not felt by the consumer, then the free market will trade too much of that good. By putting a tax on the good, the government can increase overall welfare as well as raising revenue in taxation. This is known as a "double dividend"

DEADWEIGHT COSTS OF TAXATION

In a perfect market, the price of a particular economic good adjusts to make sure that all trades which benefit both the buyer and the seller of a good occur. After introducing a tax, the price received by the buyer is less than the cost to the seller. This means that fewer trades occur and that the individuals or businesses involved gain less from participating in the market. This destroys value, and is known as the " deadweight cost of taxation"

OPTIMAL TAXATION THEORY

Most governments need revenue which exceeds that which can be provided by non-distortionary taxes or through taxes which give a double dividend. Optimal taxation theory is the branch of economics that considers how taxes can be structured to give the least deadweight costs, or to give the best outcomes in terms of social welfare

TAX BRACKET

The rate at which an individual is taxed due to a particular income level.Each income class is taxed at a different level;
Tax brackets are the divisions at which tax rates change in a progressive tax system (or an explicitly regressive tax system, although this is much rarer). Essentially, they are the cutoff values for taxable income — income past a certain point will be taxed at a higher rate

AFTER-TAX RETURN

The return from an investment after the effects of taxes have been taken into account

ADJUSTED GROSS INCOME ( AGI )

An interim calculation in the computation of income tax liability. It is computed by subtracting certain allowable adjustments from gross income

TAX EXEMPT BONDS

Under certain conditions, the interest from bonds issued by states, cities, and certain other government agencies is exempt from federal income taxes. In many states, the interest from tax-exempt bonds will also be exempt from state and local income taxes

TAX AVOIDANCE

Minimizing your taxes through legal, but aggressive, tax planning strategies. The opposite of tax avoidance is tax evasion. The IRS has called certain illegal tax schemes "abusive tax avoidance transactions," which are "abusive tax schemes."

ABUSIVE TAX SCHEME

A transaction, or series of transactions, created for the sole purpose of avoiding taxes. Unlike legal tax planning techniques, abusive tax schemes often use "multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets," according to the Internal Revenue Service

TAX EVASION

Minimizing or eliminating your taxes by using illegal tax strategies. Opposite of tax avoidance. Illegal strategies might include outright lying or cheating on a tax return, or might involve using one or more abusive tax schemes

INHERITANCE TAX

Inheritance Tax is basically the tax your "estate" must pay on your assets when you die. It is a variable tax, and one of growing concern for more and more people. Certainly, it is no longer limited to the very wealthy.
Fortunately, it is also a tax which can be planned for, and which certain mitigations can be deployed